Buying a Business
Perhaps you would like to own your own business, but are not interested in launching a new entity from the ground up. Buying an existing business may be an excellent option. It’s often less risky because, theoretically, you should be buying a “proven formula.”
Assets of an established business can include its customer base, industry goodwill, established suppliers and skilled employees, as well as identified cash flow. On the other hand, the cost of buying a business is usually higher than starting one yourself.
The following tips will help you determine whether purchasing a business is right for you, and will prepare you to meet with a Certified Business Advisor, who can provide further advice and guidance.
Questions to ask yourself?
You should be able to answer the following questions:
- Is this the right business for you?
- What will owning this business be like? Talk to the current owner and spend a day or two in the business to experience the business first-hand.
- Do you have experience in this industry?
- If not, how will you get it?
- Have you owned a business before?
- Do you understand what it takes to run a small business?
- Are you “entrepreneurial”?
Why is the business for sale?
Don’t rely solely on what the owner tells you. Probe. Ask around town. What kind of reputation does the business have? Have there been legal or financial problems? Visit the business unannounced, as a customer.
What are you actually buying?
Ask the owner for the business records. You‘ll want to see a current balance sheet and financial statements for at least three years, including tax returns and the most recent twelve months’ financial statements by month, to determine any seasonal fluctuation. What are the terms of the lease? Do the statements appear to be accurate? Have they been prepared by an accountant? Are they audited statements?
Request a specific list of all the assets you will be buying and what they are worth. Is property included? Inventory? Equipment? Generally you will be buying only the assets and goodwill, and not liabilities.
What will the seller want from me?
The seller will most likely want some information from you before they release their financial statements. This may include: a nondisclosure or confidentiality agreement, a copy of your resume, and a copy of your personal financial statement. The seller will want to know that you are a serious buyer and have the financial means to buy this business. Remember that you may be competing with other potential buyers.
Assemble an advisory team?
Your advisory team typically includes your attorney, your accountant, your banker and your SBDC Certified Business Advisor.
How do I finance the purchase?
First you will need to determine how much cash you have and how much you will need to borrow. Will the seller finance all or part of the deal? How is your credit? Can you get a bank loan? What will you use for collateral? Are the business assets sufficient collateral or will you need additional collateral, such as equity in your home?
How do I make an offer?
The offer is usually made in the form of a purchase agreement or a letter of intent. A letter of intent is a non-binding agreement that allows the buyer to take a closer look at a business and its records before committing to a formal contract. The letter of intent lets the seller know that you are serious and that the two parties are in agreement on the basic terms of the transaction, such as price, terms, conditions, and timing.
An alternative to a letter of intent is a standard purchase agreement that states specific contingencies that must be released before the offer becomes binding, such as financing. Keep a written record of meetings, conversations, and agreements with the seller or seller’s agent.â€¨
Some things to consider in your offer are: What is the proposed purchase price? What are the terms? Will you ask the seller to finance all or part of the purchase? Many times a lender will want the seller to finance part of the sale to ensure that the seller has an interest in helping the business continue to be successful. Will the seller be available after the sale to help train you or answer questions? How will the transition period be handled? How likely is it that key employees will stay with the business? Should you ask for them to sign an employment contract as a condition of sale?
Your SBDC business advisor can assist you in determining other issues to be included in the offer letter. You may also want to get your attorney involved in the drafting of the offer.
- A Consumer Guide to Buying a Franchise Sponsored by the Federal Trade Commission&nb